Call to Curb Speculators in Energy

EDMUND L. ANDREWS

Wednesday

Jul 29, 2009 at 4:18 AM

The top commodity market regulator said that the U.S. should consider limiting some energy futures trading.

WASHINGTON — The country’s top regulator of commodity markets said Tuesday that the government should “seriously consider” strict limits on the trades of purely financial investors in the futures markets for oil, natural gas and other energy products.

Opening the first of three hearings on proposals to curb speculative trading and reduce volatile price swings in oil and gas, the chairman of the Commodity Futures Trading Commission made it clear that he favored tighter volume limits on noncommercial traders — banks, hedge funds and other financial institutions — that account for a big share of trading in energy contracts.

“The C.F.T.C. is in the best position to apply limits across different exchanges, and we are most able to strike a balance between competing interests and the responsibility to protect the American public,” the commission chairman, Gary Gensler, said. “I believe we must seriously consider setting strict position limits in the energy markets.”

Mr. Gensler, President Obama’s choice to head the agency, was sympathetic to complaints from Democratic lawmakers that purely financial traders, who typically never take physical delivery of the oil or gas, have aggravated the violent swings in energy prices in the last several years.

Big buyers of oil-based fuels, like airlines, gasoline retailers and municipal power companies, have loudly complained about the volatility in energy prices and blamed much of it on the surge in financial trading.

Much of the criticism has focused on exchange-traded index funds, which are like index mutual funds but that trade like stocks and allow investors to bet on rising energy prices. The index funds are usually passive players, but they have enjoyed explosive growth as investors have tried to ride the boom in oil prices.

“This increase in volatility has been associated with a massive increase in speculative investment in oil futures,” Ben Hirst, senior vice president at Delta Airlines, told the commission on Tuesday. Mr. Hirst estimated that the surge and subsequent plunge in oil prices over the last 18 months had added $8.4 billion to his company’s bill for jet fuel. About $1.7 billion of that extra cost, he added, came from the cost of hedging against big price changes.

Crude oil prices jumped 52 percent in the first half of 2008, peaking at more than $145 a barrel last July. The price then collapsed to less than $33 a barrel last December, and is now trading around $68 a barrel.

Earlier this month, Mr. Gensler announced that the commission would consider federal volume limits on speculative traders and that it would consider tightening or overriding existing limits that were imposed by commodity exchanges like the Chicago Mercantile Exchange and the Nymex in New York.

Craig S. Donohue, the chief executive of the CME Group, which owns both the Chicago Merc and the Nymex, denied that the volatility stemmed from financial traders. He also defended the so-called index funds that have enjoyed explosive growth in the last several years.

“Blaming speculators for high prices diverts attention from the real causes of rising prices and does not contribute to a solution,” Mr. Donohue told the commission. He warned that federal volume limits on financial traders could make things worse for consumers.

“Position limits, when improperly calibrated and administered, can easily distort markets, increase the costs to hedgers and effectively increase the costs to consumers,” he said. New position limits would simply drive traders to less regulated electronic exchanges, including those based outside the United States.

“The market for energy products is global,” Mr. Donohue said, “and there is nothing to prevent market activity from migrating to those platforms that are beyond the commission’s and beyond the Congress’s reach.”

But Mr. Donohue also indicated a willingness to compromise with regulators, saying that the CME was prepared to impose its own “hard limits” on the volume of contracts that financial traders could hold at one time.

The big fight is likely to be about the exceptions to volume limits that exchanges give to major banks and Wall Street firms. JPMorgan Chase and Goldman Sachs are both major traders in energy futures, both as fund managers and for their own accounts. Both firms received exemptions based on their need to hedge against price swings, but neither bank is a commercial buyer or seller of energy products.

At the moment, the commodity exchanges impose soft limits, or accountability levels, on speculative traders. But traders routinely exceed the exchange-imposed limits, either because the exchanges do not enforce them or because they grant hedging exceptions to companies like Goldman and JPMorgan.

Mr. Gensler released data showing that dozens of traders routinely exceeded the Nymex’s accountability levels by wide margins for crude oil, natural gas, heating oil and gasoline. In natural gas, many traders had positions almost four times bigger than the exchange accountability levels.

“The exchanges do have the authority to ask market participants to take their positions down,” Mr. Gensler said. “The majority of the time, however, the exchanges do not execute their authority.”

If the commission does decide to impose new restrictions, Mr. Gensler said on Tuesday, he hopes to have them ready some time this fall.

The commission is preparing a new report on whether speculators played a significant role in the rising price volatility. But on Tuesday afternoon, Mr. Gensler said press reports were “premature” and inaccurate in speculating on what the report’s conclusion would be.

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